Coffee price volatility in Ethiopia: effects of market reform programmes

Abstract This study presents the results of an empirical investigation into the effects of market reform programmes in Ethiopia and their impact on the volatility of coffee prices. The study covers the period from 1982 to the end of 2001, though its main focus is on the period after the commencement of the reforms in 1992. Using the Generalised Autoregressive Conditional Heteroskedasticity (GARCH) techniques, we argue that there is evidence that Ethiopia experienced a significant increase in coffee price volatility after the adoption of the market‐oriented reform programmes. This is consistent with much of the literature. The econometric evidence presented in the paper, suggests that the market reform programmes were a significant cause of the increased volatility after 1992. The authors also suggest a number of possible policy responses to the price volatility, including strengthening the role of smallholder producer associations; and the possibility of adopting appropriate risk‐management strategies. However, the institutional and structural characteristics of coffee production in Ethiopia within the global market for coffee may mitigate against the successful implementation of such policies. The fact that Ethiopia is a price‐taker in this market and is therefore prone to external shocks in coffee prices over which it has little control or influence means that the country will continue to be highly vulnerable to the natural cycles that are endemic in the production of such primary commodities as coffee. Copyright © 2007 John Wiley & Sons, Ltd.